Despite months of Kuroda saying the policy was not a timely
option, BOJ officials had been quietly considering it as
financial markets began to question just how far the central
bank could go with its aggressive asset-buying programme.

"Never say never" is a mantra for BOJ officials, who see
themselves as pioneers in battling deflation - through zero
rates, quantitative easing and other unconventional policies.

But a razor-thin 5-4 vote underscores the difficulty Kuroda
had in winning enough board backing for his shock tactic, and
illustrates the doubts among board members about the governor's
line that by sticking to a 2 percent inflation goal the BOJ can
make people believe prices will rise.

Publicly, Kuroda was unwavering in saying Japan was on track
to hit his ambitious inflation target and that quantitative and
qualitative easing (QQE) was working down through the economy.

But talk of more monetary easing began to emerge last month
as policymakers fretted over weak inflation expectations, enough
to ponder expanding the stimulus, said people familiar with the
BOJ's thinking.

The bank's latest quarterly survey showed that corporate
inflation expectations weakened in October-December, and other
similar market gauges also sagged. Companies blamed the global
economic uncertainty for not raising wages or capital
expenditure.

Fine-tuning QQE last month with elements of monetary easing
signalled some alarm among central bankers over the heightened
deflationary risks, the people said.

Top BOJ economists began looking into whether to further
modify QQE or go for a full makeover of the monetary easing
framework - all the time considering what policy tools were
still available if the BOJ eased again.

Negative interest rates was one of those options, though it
was down the list given the technical difficulties of expanding
base money while charging banks for piling up funds in BOJ
accounts.

At the start of the year, Kuroda switched to stronger
language in public to warn he would do "whatever it takes,
including more easing," to hit his price target - likely
prompted by the impact of global market turbulence on Japanese
share prices and local business sentiment, the people said.

"When stocks are falling this much, it's hard to justify not
acting," said one of the individuals, who has occasional contact
with Kuroda.

DAVOS TRIGGER?

On Jan. 21, a day before flying out for the annual World
Economic Forum in Davos, Kuroda told Japan's parliament he was
not considering negative interest rates. But he quietly told his
staff to come up with several options in case the BOJ eased.

"Of course, our staff knew that several central banks have
adopted negative interest rates, so they've been analysing the
step for some time," Kuroda said at a news conference on Friday.
"They raised it as one of the options, which we discussed at
today's meeting."

By the time Kuroda returned from Davos, BOJ staff were ready
to propose negative rates, taking a leaf from the European
Central Bank's book. "The ECB showed that combining QE and
negative interest rates can work," one BOJ official said. "It
was just a question of overcoming some technical difficulties."

People close to Kuroda say that Davos - where he mingled
with central bankers such as ECB President Mario Draghi and
leading company executives - likely prompted him to pull the
trigger. "Davos is really important. Many central bank governors
change their perception of things there," said one central bank
policymaker who has regular interaction with Kuroda.

BOARD CHALLENGE

The big challenge was to drive the shock move through his
nine-member board.

At least three members remain deeply suspicious of how
effective QQE is and strongly oppose further monetary easing.
They all voted against on Friday.

That left Kuroda and his two deputy governors having to
convince the three swing voters: former academics Sayuri Shirai
and Yutaka Harada, and former auto executive Yukitoshi Funo.

Harada backs aggressive monetary easing and has signalled
his concern over weak consumption and wage growth, according to
recent public remarks, and so would not have been opposed to
taking further action. As a board newcomer and advocate of
premier Shinzo Abe's "Abenomics" stimulus policies, including
QQE, Funo is unlikely to have rocked the boat.

That should have guaranteed a narrow support for Kuroda's
move, but winning over Shirai was crucial to convincing markets
that Kuroda had a solid majority behind him.

Shirai was a strong advocate of QQE when it was deployed in
April 2013, and initially echoed Kuroda's optimism for achieving
2 percent inflation, but since a sales tax hike pushed Japan
into recession last year, she has argued that the BOJ should
take more time to reach the ambitious inflation target.

"Such doubts (about the success of QQE) may have been enough
for Shirai to vote against monetary easing," said one person
familiar with the BOJ's thinking, adding:

"It might have been her last revolt," before her term
expires in March.
(Reporting by Leika Kihara; Editing by Ian Geoghegan)